April 2023 | Volume 14, Issue 9

Read the full article from ABC News.

According to the article, a class action lawsuit is being filed against the parent company of Silicon Valley Bank, its CEO, and its chief financial officer, saying that the company did not disclose the risks that future interest rate increases would have on its business.

The lawsuit against SVB Financial Group, CEO Greg Becker and CFO Daniel Beck was filed in the U.S. district court for the Northern district of California. It is looking for unspecified damages to be awarded to those who invested in SVB between June 16, 2021 and March 10, 2023.

The lawsuit from shareholders led by Chandra Vanipenta says some quarterly and annual financial reports from SVB did not fully account for warnings from the Federal Reserve about interest rate hikes.

In particular, the lawsuit said that annual reports for 2020 through 2022, “understated the risks posed to the company by not disclosing that likely interest rate hikes, as outlined by the Fed, had the potential to cause irrevocable damage to the company,” the lawsuit stated.

It also claims that the company "failed to disclose that, if its investments were negatively affected by rising interest rates, it was particularly susceptible to a bank run.”

The collapse of Silicon Valley Bank has shaken the technology industry and worried small businesses and individuals with deposits at the financial institution. The Biden administration’s move guaranteeing all Silicon Valley Bank’s deposits above the insured limit of $250,000 per account has brought relief to some.

Silicon Valley quickly established itself as the “go-to” spot for venture capitalists looking for financial partners more open to unconventional business proposals than its bigger, more established peers who still didn’t have a good grasp of technology.

Venture capitalists set up their accounts at Silicon Valley Bank just as the tech industry started its boom and then advised the entrepreneurs that they funded to do the same.

That cozy relationship came to an end when the bank disclosed a $1.8 billion loss on low-yielding bonds that were purchased before interest rates began to spike last year, raising alarms among its financially savvy customer base who used the fruits of technology to spread warnings that turned into a calamitous run on deposits.

Discussion Questions

  1. What is a class action lawsuit?
    A class action is a procedural device that permits one or more plaintiffs to file and prosecute a lawsuit on behalf of a larger group, or "class." A class action allows courts to manage lawsuits that would otherwise be unmanageable if each class member (individuals who have suffered the same wrong at the hands of the defendant) were required to be joined in the lawsuit as a named plaintiff. 

    Historically, various types of so-called “representative actions” have existed since the earliest days of English law. Class actions, however, are more a recent invention, created by English courts sitting in equity as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only. 

    While it has its origins in equity, a class action is now a useful procedural litigation device that permits a small number of plaintiffs to represent and legally bind an entire class through a single lawsuit.

    But class actions do much more than simply address the situation of “too many plaintiffs” to litigate a case manageably: The justifications that led to the development of the class action include the protection of the defendant from inconsistent obligations, the protection of the interests of absentees, the provision of a convenient and economical means for disposing of similar lawsuits, and the facilitation of the spreading of litigation costs among numerous litigants with similar claims.  Moreover, the class action device saves the resources of both the courts and the parties by permitting an issue potentially affecting every class member to be litigated in an economical fashion.

    To proceed as a class action under Rule 23 of the Federal Rules of Civil Procedure requires that the district court make the following findings: (1) the number of class members renders it impracticable to join them in the action, (2) the class members' claims share common questions of law or fact, (3) the claims or defenses of the proposed class representatives are typical of those for the rest of the class, and (4) the proposed class representatives will adequately protect the interests of the entire class.

    In addition to the numerosity, commonality, typicality and adequacy of representation requirements of Rule 23, the district court must make at least one of the following findings: (1) requiring separate actions by or against the class members would create the risk of inconsistent rulings, or that a ruling with respect to individual class members may be dispositive of other class member claims, thereby substantially impairing or impeding their ability to protect their interests; (2) the party against whom the class seeks relief has acted or refused to act on grounds generally applicable to the class so that injunctive or declaratory relief as to the entire class would be appropriate; or (3) common questions of law or fact predominate over class member-specific questions, and that proceeding by way of class action would be superior to other available methods for resolving the dispute. 
  2. What is the legal basis for the subject lawsuit?
    As explained in the article, the lawsuit against the parent company of Silicon Valley Bank, its chief executive officer, and its chief financial officer is based on the contention that the company had a duty to disclose to shareholders the risks that future interest rate increases would have on its business but failed to disclose those risks.
  3. What is a bank run?
    A bank run occurs when many customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank’s solvency. As more people withdraw their funds, the probability of default increases, which in turn can cause more people to withdraw their deposits. In extreme cases, the bank’s reserves may not cover the withdrawal.